understanding the Actual cost
of obtaining a home loan
The cost of obtaining a mortgage can really be broken down into two simple categories – the loan Interest Rate and the Lender Origination Charges.
The loan interest rate is simple to understand. It’s the rate of interest at which you will repay your loan. The interest rate is normally disclosed on the original estimated fee sheet that you’ll receive from your loan officer. But the Lender Costs, called “Origination Charges” are much harder for the consumer to look at and determine what the actual cost of the loan is.
Why? Because when a lender gives you a loan cost estimate, it shows you ALL the costs involved in closing a home loan. This includes the lender fees…but also includes the fees charged by outside service providers, such as the Appraiser and the Title Company and it also shows you the charges for your “Pre-Paid Items” – your taxes, insurance and interest due at time of closing.
All of these numbers are bundled together and totaled at the bottom in a line called “Total Estimated Funds needed to close.” But…you need to know that this TOTAL number includes many things that vary greatly dependent on the Loan Officer’s estimate and it also includes a “credit” for any of your costs being paid for by the seller in a purchase transaction.
So, how do you know how much THE LOAN is actually costing you?
Look at the very top section of your loan cost estimate. The top section of charges will be entitled “Origination Charges” – and that is the actual cost that the lender is charging you for your loan! With Premier Mortgage Lending our origination charges will normally be ZERO – on any of our traditional loan products.
When comparing, concentrate on those Origination Charges because all of the other charges, regardless of which lender you use, will be basically the same. The “Other Charges” DO NOT vary among lenders – those for the most part will be the same with all lenders.
So, if your “Origination Charges” show anything but ZERO under origination charges – you need to get a second estimate to compare.
If you want to pay more to get the exact same thing – that’s your prerogative. But if you prefer to save money – check the origination charges, and you may be shocked at the difference!
The Background of
The financial crisis of 2007-2010 led to widespread calls for changes in the regulatory system.
As a result, two U.S. politicians, Barney Frank & Christopher Dodd, got together and wrote “The Financial Reform Act for America”…commonly called the Dodd-Frank Act.
A portion of that Act regulated the mortgage industry.
One of the regulations eliminated a practice called ‘Yield Spread Premium’ – which basically was a way for a loan originator to increase their commission by charging you a higher interest rate. And the new rules put a “maximum cap” on how much you can be charged for a home loan.
But the reality is that they only capped the visible charges – the ones that you plainly see on your Good Faith Estimate – but they put no cap on the unseen charges called the ‘Service Release Premium’.
This service release premium is yet another way for banks and mortgage banks to make more money – by charging you a higher rate!
The result has been that Mortgage Brokers, like Premier Mortgage Lending, are firmly regulated and now offer you the lowest rates – and charge NO FEES.
Banks & mortgage bankers have no limits on the profits they can make on your loan.
The Differences Between Lenders
As you hunt for a home loan, you will run across three different options of where to apply.
Your choices will be banks, mortgage banks or mortgage brokers.
You will naturally want to get “the best deal” on your loan, so having a little knowledge of the differences will help you.
While banks and mortgage banks are ‘direct lenders’ they normally sell only their own loan products.
Mortgage Brokers are middle-men and are compensated for getting you the best loan at the lowest rate.
In today’s real estate environment you will probably get the best deal on a home loan through a mortgage broker… for a number of reasons.
First of all, a Mortgage Broker can “shop” your loan amongst several different lenders to get you the best deal. And due to new Federal Regulations in the mortgage industry – regulated in 2014 – a Broker can now make you a home loan and charge – NO FEES!
Secondly, a mortgage broker is typically a small locally-owned company with small operating expenses. Only two people will make money on your loan, the Loan Officer and the Owner.
While banks and mortgage banks are large operations with layers of management where every layer makes a little bit on your loan. From the Loan Officer to the Manager to the District Manager, the Assistant Vice President, the Vice President, the Senior Vice President…and on and on!
Visible vs. Invisible Loan Charges
“What’s in a name? That which we call a rose by any other name would smell as sweet.” How right Shakespeare was!
We’ve been talking about the difference between lenders and the advantages of using a Mortgage Broker. You need to understand that there are two different sources of income that can be earned on a home loan.
The first income source is a “visible charge” that is fully disclosed on your Loan Estimate. This fully disclosed visible charge is “capped” by Federal Law, and is the ONLY income that a Broker can earn on your loan.
When a borrower closes a loan with a Mortgage Broker the borrower is fully aware of ALL the revenue that the Broker earns on their loan.
On the other hand, the “undisclosed income”, called Service Release Premium, paid to a bank when it sells an ‘above par’ loan into the secondary market is an “invisible charge”.
Consumers are never made aware of the amount of profit that large institutional lenders generate when they sell your loan ‘servicing rights’!
What does all this mean to you the consumer?
It means that while Mortgage Brokers are capped in what they can make on your loan and charge you NO FEES, Banks & Mortgage Banks have virtually no limits on the profits they can earn on your loan.
Understanding the Seller Incentive
Have you heard the phrase about “smoke and mirrors?” Well that phrase certainly applies to the mortgage industry in regards to your cost to obtain a mortgage to purchase a home!
In the case of your loan costs, the “smoke” is the Seller Incentive, that portion of your closing costs that the seller has agreed to pay in order to induce you to purchase their home.
The “mirrors” is what the actual “cost” of your loan is.
Let me give you an example. Assume that you are purchasing a home for $250,000 and the seller has agreed to a 2% seller incentive. That means that as an incentive for purchasing their home, the seller is going to kick in $5,000 towards your closing costs. If the total closing costs are $10,000, half of your costs, or $5,000, will be paid by the seller.
But now let’s say that you are doing a loan with No Lender Fees!
So, your lender charges are zero, and your closing costs for the other service providers such as title & escrow and the payment of your ‘pre-paid’ charges for property taxes, insurance, etc. are only $5,000. Then, the seller’s incentive covers ALL of your costs, and you’ve saved $5,000 in true out-of-pocket cash.
Don’t let the smoke & mirrors confuse you! In this example one loan cost you $5,000 in lender fees, and the other loan cost you nothing in lender fees – both to obtain the exact same interest rate!
It’s important to understand that when a seller agrees to pay a portion of your closing costs by way of a seller incentive, they’ve agreed to pay you that money regardless of how you use it.
Make sure not to burn up their incentive paying unnecessary lender charges.
Marketing Services Agreements
When do two halves not make a whole? When you’re talking about Marketing Services Agreements – commonly called MSA’s.
MSA’s are contractual agreements commonly used between a mortgage lender and a Real Estate Broker. What they “say” is that the mortgage lender will pay a fee to said Real Estate Broker for “marketing” of their goods & services.
Theoretically, the payment has nothing to do with how many loans that lender gets – they’ll just pay that monthly fee regardless.
Now let’s talk reality!
In the case of most MSA’s, the Broker receives a monthly fee from that lender to “push” that mortgage company onto their agents. The Broker explains to their agents that they should ‘exclusively recommend’ that certain lender who pays them that monthly fee because: they’re the best or they have an office inside of their office or they’ve known them for a long time and they can rely on them. Once again, it has nothing to do with the monthly payment they receive!
All of that is well and good except the way the extra loan revenue to pay that monthly fee is generated. Typically what happens is that the lender increases your interest rate in order to offset that payment – so their bottom line profit is not affected.
The bottom line to you, the homebuyer, is that if you use a Real Estate Agent whose Broker has an MSA in effect, you will probably end up paying a higher rate of interest and/or higher fees.
When you are interviewing Real Estate Agents, besides questioning them about their experience, be sure to ask them, “do you work in an office where your Broker has an MSA in effect with a mortgage lender?”
If the answer is ‘yes’ and they are referring you to that ‘preferred lender’ – be sure to get a second quote from another lender that isn’t paying that monthly fee – more than likely you’ll save yourself a lot of money!
Advantages for Real Estate Agents
What if every one of your buyers had an extra $3,000, $5,000, $8,000 or more in their pocket at closing?
What if you could show your buyers an estimated closing statement showing a $4,000 cost to close instead of $8,000?
The truth is that you can have both of these!
On January 10th of 2014, everything that you knew about mortgage lenders changed. That was the date that the Consumer Finance Protection Bureau implemented new regulations which “capped” the fees that a Mortgage Broker can charge you to obtain a home loan. But that “cap” really only affected the Mortgage Brokers, while banks and mortgage bankers were left to charge whatever rate they want to your buyer by simply manipulating their “Service Release Premium”.
If your buyer is applying for a 30-year fixed rate mortgage…and the interest rate was the “exact same” at two different mortgage companies, wouldn’t you want your buyer to get the best deal on their loan?
Why would you want a buyer to pay more than they have to?
Wouldn’t you be able to sell more homes and close more deals if you can reduce your buyer’s cash to close?
Think of it this way! Suppose the loan interest rate will be the exact same if you refer your buyer to a Mortgage Broker or a Mortgage Banker.
The Broker is normally a small organization with low operating costs. In the case of a bank or a large national mortgage company – your buyer’s loan profits need to feed the paychecks of not only the Loan officer, but layers of management and large operational expenses. Do yourself and your buyers a favor and shop their loan with a Mortgage Broker. They’ll be happy you did – and you’ll get more closings with more happy buyers.